Oil falls as economy and demand growth sputter

The EIA released their latest Short Term Energy Outlook report yesterday afternoon. The main highlights related to the oil sector follow.

EIA expects U.S. total crude oil production to average 6.2 million barrels per day (bbl/d) in 2012, an increase of 0.5 million bbl/d from last year, and the highest level of production since 1998. Forecast lower-48 onshore crude oil production in 2012 averages over 4.3 million bbl/d, reaching its highest level since 1993. Projected U.S domestic crude oil production increases to 6.4 million bbl/d in 2013, driven primarily by growth in lower-48 onshore production.

EIA expects that global oil markets will continue to remain tight in 2012, although markets have eased somewhat since mid-March. Year-over-year supply growth in 2012 should significantly exceed the projected 1.0 million bbl/d rise in consumption, and we expect global commercial stocks to build following the significant draws during 2011. The oil production gains contributed to a counter-seasonal stock build during the 1st quarter of 2012 and a moderate reduction in backwardation in crude oil prices. However, EIA does not expect these large counter-seasonal stock builds to continue throughout the year, and both global oil inventory and spare production capacity levels are projected to be tight enough to support higher average crude oil prices in 2012 than in the previous year. The projected oil market balance reflects the impacts from previous sanctions against Iran, but the potential impacts of the more recent sanctions set to take effect this year are not accounted for in the current Outlook.

Crude oil prices have declined after increasing through mid-March, as global liquids supply outpaced consumption by 0.6 million bbl/d in first quarter 2012, which led to global inventory builds. The easing in the backwardation of waterborne light crude prices noted in EIA’s April 27th report has also continued in recent days. While price trends and reduced backwardation signal some market easing, the continuing premium on contracts for near-term delivery and a price level that remains elevated relative to the fourth quarter of 2011 is still indicative of tightness in world oil markets.

There are several uncertainties that could push oil prices higher or lower than projected. A number of countries outside of the Organization of the Petroleum Exporting Countries (OPEC) are currently undergoing supply disruptions, as discussed in EIA’s April 27th report and the April 18 edition of This Week in Petroleum. Oil prices could be higher than projected in this Outlook if recoveries from supply disruptions are slower than forecast, additional disruptions occur, or supply growth is lower than expected. Additionally, although the effects of the impending European Union embargo and other sanctions targeting exports of Iranian crude oil and their associated payments are still uncertain, heightened market anxiety surrounding a potentially significant supply disruption could bolster oil prices. On the demand side, economic growth below current expectations could result in reduced oil demand and lower prices.

World liquid fuels consumption grew by an estimated 0.8 million bbl/d in 2011. EIA expects consumption growth of 1.0 million bbl/d in 2012 and 1.2 million bbl/d in 2013, with China, the Middle East, Central and South America, and other countries outside of the Organization for Economic Cooperation and Development (OECD) accounting for essentially all consumption growth (World Liquid Fuels Consumption Chart). OECD liquid fuels consumption is projected to decline by 0.4 million bbl/d in 2012, with Europe and, to a lesser extent, the United States accounting for almost all of the decline. In 2013, forecast OECD liquid fuels consumption is expected to remain essentially flat.

EIA expects non-OPEC crude oil and liquid fuels production to rise by 0.7 million bbl/d in 2012 and by a further 1.1 million bbl/d in 2013. The largest area of non-OPEC growth will be North America, where production increases by 680 thousand bbl/d and 260 thousand bbl/d in 2012 and 2013, respectively, resulting from continued production growth from U.S. onshore shale and other tight oil formations and Canadian oil sands. In Brazil, output is projected to rise annually by an average of 130 thousand bbl/d over the next two years, with increased output from its offshore, pre-salt oil fields. EIA expects that Kazakhstan, which will commence commercial production in the Kashagan field next year, will increase its total production by 160 thousand bbl/d in 2013. Production also rises in China and Colombia over the next two years, while production declines in Mexico and the North Sea.

EIA expects that OPEC members will continue to produce slightly over 30 million bbl/d of crude oil over the next two years to accommodate the projected increase in world oil demand and to counterbalance supply disruptions. Projected OPEC crude oil production increases by about 1.0 million bbl/d in 2012 and then falls by 0.3 million bbl/d in 2013 as non-OPEC supply growth increases and stocks remain flat. OPEC non-crude petroleum liquids (condensates, natural gas liquids, coal-to-liquids, and gas-to-liquids), which are not covered by OPEC’s production quotas, are forecast to increase by 0.2 million bbl/d in 2012, and by 0.1 million bbl/d in 2013.

EIA expects Iran’s crude production to fall by about 500 thousand bbl/d by the end of 2012 and by an additional 200 thousand bbl/d in 2013, from its previous output level of 3.55 million bbl/d at the end of 2011. Iran’s output decline began to accelerate during the last quarter of 2011 and has continued. EIA believes that this acceleration reflects a lack of investment, which is needed to offset natural production declines. A number of foreign companies that were investing in Iran’s upstream have halted their activities as a result of previous sanctions against Iran that have made it difficult to do business with the country. EIA expects that the forecast decline in Iran’s output will be offset by increased production in other OPEC member countries.

EIA estimates that OECD commercial oil inventories ended 2011 at 2.59 billion barrels, equivalent to 56.1 days of forward-cover (Days of Supply of OECD Commercial Stocks Chart). Projected OECD oil inventories increase to 2.64 billion barrels and 57.3 days of forward-cover by the end of 2012. Although the forecast December 2012 inventory is slightly lower than the 2.66-billion-barrel level at the end of December 2010, the days of forward-cover are still among the highest end-of-year levels since 1991 because of the decline in OECD consumption.